Takako Hatayama-Phillips
The Federal Reserve needs to be mindful specifically to three factors when making policy decisions — cumulative tightening, lags in monetary policy, and the evolution of data, San Francisco Fed President Mary C. Daly said Monday at an Orange County Business Council event.
Cumulative tightening takes into account not just the Fed's rate hikes, but its quantitative tightening moves and the actions of other central banks. She suggested looking at financial market conditions to get a better idea of the actual level of tightening.
"In fact today, while the funds rate is between 3.75 and 4 percent, financial markets are acting like it is around 6 percent," Daly said.
And "while financial markets react quickly to policy changes, the real economy takes longer to adjust. Overlooking this lag can make us think we have further to go when, in reality, we just have to wait for earlier actions to work their way through the economy," she added. There's no broad consensus on exactly how long the lag to the economy is, "there is broad agreement that it's not immediate and likely takes at least several quarters."
In addition to being mindful of the lag, the policymakers need to keep a close eye on how economic data is unfolding. The housing sector has already cooled substantially as interest rates pushed up mortgage rates. Labor markets, which still strong, are showing some early signs of easing. She pointed out that job openings are down about 10% from their March high and that job growth is slowing. Also, the latest inflation report had "some encouraging numbers," but "one month of data does not a victory make."
Looking ahead, she'll be "watching for further calming in these areas, as well as signs that pandemic-related imbalances between supply and demand are continuing to subside."
"While resolute and mindful are not in conflict, there is a tension," Daly said. "And that’s what we want in policymaking. We want to go far enough that we get the job done. That’s the resolute part. But not so far that we overdo it. And that’s the mindful part."
Update at 1:35 PM ET: With the federal funds rate is currently at 3.75%-4.0% and the inflation is still printing at 7.7%, "we have a lot of work to do," Daly said. Based on history, the amount of lag, and other factors, "my own outlook is about 5%," she said, adding that it can end up being a little over 5% or a little under.
That number, though, is "not set in stone."
1:54 PM ET: "I don't think of FTX as changing [the] conversation" for a central bank digital currency, she said. "We're always thinking of balancing innovation with consumer protection," she added. A CBDC would require Congressional approval, Daly noted.
Event concludes at 1:56 PM ET.
Last week, Minneapolis Fed President Neel Kashkari said said it's still an "open question" as to how high the Fed will raise rates, as the U.S. economy is sending "some wildly mixed signals."